General Motors' Chinese Secret

China's domestic auto industry may be a mass of mostly unfamiliar names, but the hottest-selling subcompact car in China wears a badge you'd instantly recognize. With its golden bowtie and signature crossbar-split grill, the Chevrolet New Sail's family resemblance to more-familiar-to-us Chevys like the Volt or Malibu would be hard for any American to miss.

But while the New Sail is one of General Motors' (NYSE: GM) best-selling new models -- it sold in greater numbers last month than the Volt is likely to amass in all of 2011 -- it isn't a car we're likely to see here anytime soon. With the New Sail, GM is the first global automaker to launch an affordable small car developed and built entirely in China.

That's just one small part of a success story that is helping to drive the GM renaissance. But it's a story that comes with a big caveat.

The most American of companies leading a most unlikely marketChina is an increasingly important market for major automakers like Ford (NYSE: F) , Toyota (NYSE: TM) , and even India's Tata Motors (NYSE: TTM) , but none has a Chinese presence that compares with GM's. The General sold more than 2.3 million vehicles in the Middle Kingdom in 2010, a record for a non-Chinese automaker. That was a 29% increase over an impressive result in 2009, and well ahead of GM's closest non-Chinese competitor in the country, Volkswagen.

In fact, GM sold more vehicles in China (2,351,610) than it did in the U.S. (2,215,227) -- or to be specific, GM and its Chinese partners sold all those vehicles. See, GM's China numbers come with a big caveat: Like the other global automakers, GM's sales and manufacturing in China are done via joint ventures with local companies. GM has three separate joint ventures in the country, and while GM has the right to count all of those ventures' sales as its own, the profits are split with its partners.

A look at GM's earnings makes the point. Third-quarter net revenue for GM's North American division was about $21.5 billion versus a bit less than $9 billion for its international operations division, a group dominated by China. That's a big gap -- but the telling part is that the divisions produced about the same number of vehicles during that period.

So is China really all that important to GM?In a word, yes. GM may be sharing its piece of the Chinese pie, but it's a big piece and it's still growing rapidly. While the meteoric growth of auto sales in China is starting to taper off, it's far from done, with a leading analyst calling for a roughly 15% increase in 2011.

More to the point, GM's investment in China is massive, and its brand recognition enormous. While about half of GM's Chinese sales were of small delivery vans sold under the Wuling brand name, most of the rest was split between Chevrolet and Buick -- more than half a million of each, with a few Cadillacs and trucks thrown in for good measure. GM is in the process of building an "Advanced Technical Center" in Shanghai, which when completed will lead GM's global R&D in several key areas.

It's even possible (I'd say it's a slam-dunk, actually) that future models developed entirely in China could be sold here in the United States. GM leverages work done by its global divisions all the time -- the Buick Regal is a variation of an Opel model developed by GM in Germany, the Chevy Cruze (a big seller in China, by the way) was largely designed in Korea, and the very American Camaro was in fact developed by GM's Australian group.

This relationship isn't all roses, of course. GM's all-but-indispensible key partner in China, SAIC, is part-owned by the Chinese government, and hackles were raised when SAIC announced its plans to invest in GM's IPO. But for the moment at least, SAIC needs GM at least as much as GM needs SAIC, and China is likely to be adding significantly to GM's bottom line for the foreseeable future.

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I wouldn't count on wild growth in China. The government is imposing limits on car purchases. Further, the consumers will soon realize that purchasing a car is nice for "face" but it is not an efficient means of getting around due to the millions of people stuck with them in traffic. This is not the same dynamic as the US where we have a larger amount of space with less per capita population. Traffic is already horrendous in the east coast cities and with even small % increases we will see traffic jams even on large highways. Hello.....anyone been on highways and roads in Beijing and Shanghai!? China is never the US and never will be.